Msf 507 Multinational Finance Town Campus Question Paper

Msf 507 Multinational Finance Town Campus

Institution: Kca University question papers

Exam Year:2014

UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTERS OF SCIENCE (MSC) IN COMMERCE
(FINANCE AND ACCOUNTING)
MSF 507 MULTINATIONAL FINANCE TOWN CAMPUS
DATE: AUGUST, 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and Any Other Three Questions
QUESTION ONE (31 MARKS)
FDI AND DEVELOPMENT: TANZANIA
The United Republic of Tanzania is a new entrant in the FDI field. Its efforts to harness FDI to its
development process date back nominally to 1985, when the country decided to initiate the process of
transition from centrally planned to a market based economy. However, it was only on the second half
of the 1990s- when the economy situation improved, the privatization programme began in earnest,
market oriented reforms reached a critical mass and sound foundations for an enabling framework for
FDI (including especially the Tanzania Mining Act, considered the “best” of its kind) were put in place
that foreign investors responded. During 1995-200, the United Republic of Tanzania received a total of

$1billion in FDI, compared to$ 90 Million during the preceding six years. This is a remarkable
performance for a country that was receiving hardly any FDI just ten years ago.
The acceleration of inflows between 1992 and 1996 considerably improved the country’s FDI
performance relative to other LDCs which have also worked hard to receive more FDI but, with a few
exceptions, have not been very successful. The United Republic of Tanzania, has furthermore,
improved its position vis-à-vis neighbouring countries. Overall during 1995-2000, it received inflows
comparable to those of Uganda (

$1.1 billion) and Mozambique ($ 0.9 Billion). After 1996, although
growing in absolute terms , annual inflows to the United Republic of Tanzania did not keep pace with
the inflows into LDCs, sub-Saharan Africa or neighbouring countries(except for poor-performing
1
Kenya), and Tanzania lost some of the gains of the mid 1990s.
The largest sector for FDI in the United Republic of Tanzania is mining, and the largest industry is
gold. At the end of 1998, the cumulative FDI in mining was estimated at

$370 million. This suggests a share of mining in cumulative FDI inflows of above 50%. Judging from data on total investments in major foreign affiliates, most of which were established during 1997-200, the sectoral composition of the largest project is: mining (65%) service (19%) and manufacturing (16%). The largest source of FDI in the country is the United Kingdom followed by the United States, Ghana and South Africa. As FDI inflows have increased, the qualitative impact of FDI on the economy has also become noticeable, especially in industries which FDI is concentrated. In mining, FDI has served as an engine of growth and has helped increase gold exports. In banking, it has contributed to the modernization of the industry. Foreign investors have restructured privatized enterprises boosting their competitiveness. They have typically contributed to the transfer of technology and skill. Although the impact is strongest in industries in which FDI is concentrated, it has implications to the entire economy. Noticeable overall impacts of FDI include a contribution to the inflow of external resources (15% in 1998); a change from a negative to a positive contribution to the balance of payment; the contribution of foreign affiliates to overall exports and inflows of hard currency from tourism; an increased share of FDI in capital formation, thus growth; and the diversification of the economy away from agriculture towards mining and services. These positive impacts- which hardly existed until the mid 1990s go some way towards achieving the country’s FDI objectives. The objectives are, among others “to increase the share of foreign direct investment in total external resources inflows” and “to invest in export areas in which Tanzania has comparative advantage”. However, the scale of these impacts is still small and a number of desired impacts are not occurring (such as linkage to the local economy or the encouragement of local science and technology capabilities). Thus after the initial successes, with FDI, the challenge for the United Republic of Tanzania is now to push FDI to new frontiers, to attract higher levels of FDI inflows than those received in the second half of the 1990s and to increase the scale and scope of the benefits of these inflows to the economy. Required: a) Discuss how the increase in FDI into Tanzania increase during 1990s compared to the neighbouring countries. b) (11 Marks) Analyse the sectors which were the sectors attracted the largest FDI and why in your opinion they were the preferred sectors. (10 Marks) 2 c) Explain the ways if any, in which the FDI contributed to economic development in Tanzania. (10 Marks) QUESTION TWO: (23 MARKS) (a) Describe Role of Central Bank of Kenya in Financing International Trade and Business to promote its growth. (b) (10 Marks) Use the information provided in the following table to Calculate the actual forward rates when the US Dollar and the Portuguese Escudo are quoted as follows: US DOLLAR SPOT 1.7405-15 1 Month 0.25-0.20c PM 3 Months 0.90-0.80c PM ESCUDO SPOT 258.51-269.65 1 Month 42-62 C disc 3 Months 78-98c disc (13 Marks) QUESTION THREE: (23 MARKS) (a) A project of the subsidiary with an initial investment of Dollar Million has a net operating cash flow of$ 10 Million each of three years during the lifetime of the project and a salvage value of

$4Million. The host government permits the cash flow to the home country only after the lifetime of the project. But the subsidiary invests the funds at a rate of 12% till the actual outflow takes place. Find the NPV assuming a discount rate of 10%. What will be the NPV if; i) (06 Marks) ii) (b) The funds are not invested. There is no restriction on the outflow of funds (06 Marks) Explain why Premiums are always quoted with higher figures on the left and lower figures on the right (11 Marks) QUESTION FOUR: (23 MARKS) (a) A firm with an overall debt-equity ratio of 1:2, an after-tax cost of debt at 7% and cost of equity capital at 15% is taking up a project abroad. The debt- equity norm of the foreign project is not different but the systematic risk pulls down the cost of equity to 12%. There is no change in the 3 expected after-tax cost of debt. Calculate the weighted average cost of the capital. (13 Marks) (b) Explain the qualitative and quantitative techniques for evaluating political risk. (10 Marks) QUESTION FIVE: (23 MARKS) (a) Ruaraka Exporting Co. purchases raw materials from within Kenya and uses them to make goods that are exported to Tanzania. Ruaraka prices its products in Tsh and is concerned about th possibility of the lon-term depreciation Tsh against Ksh. It periodically hedges its exposure with short-term forward contracts, bt this does not insulate against the possible trend of continuing Tsh depreciation. Required: Explain how Ruaraka could offset its exposure resulting from its export business? (13 Marks) (b) What additional factors deserve consideration in multinational capital budgeting that are not normally relevant for purely domestic project? (10 Marks) QUESTION SIX: (23 MARKS) (a) A MNC whose head office is in Kenya is making appraisal of its project to be set up with its subsidiary in the USA. The initial project cost amounts to US$ 125,000 which as expected will
add KShs. 3,000,000 to the Kenya Company’s borrowing capacity over a period of three years.
A sum of KShs. 4,000,000 of the initial investment as met by the Kenyan Parent and the
remaining

$25,000 is borrowed at 10% interest rate in the USA. The project has a life of three years. The net operating cash flow is$ 50,000,

$60,000 and$ 72,000 respectively in the first,
second and third year respectively. The salvage value is expected to be

$10,000 The Spot Exchange rate is KShs. 40/$ . It is assumed that the PPP holds with no lag and the real
price remains constant in both absolute and relative terms. Hence the sequence of the exchange
rate reflects the anticipated annual rates of inflation equating 8% in Kshs and 5% in Dollar.
Depreciation amounts to KShs. 15,000,000 a year for three years. Tax rate is 30% in Kenya and
25% in the USA. Expected tax savings from intra-firm transfer pricing is Kshs. 50,000 a year in
all the three years. Discount rate for cash flow assuming all equity financing is 20%. Discount
rate for depreciation/tax saving on interest deductions from contribution to borrowing capacity
at 12%.Discount rate relating to loan repayment is 20% and on tax saving on account of
transfer pricing is 25%. Calculate the adjusted present value.
(b)
(15 Marks)
Distinguish between Multinational and Transnational Corporations (08 Marks)
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Msf 507 Multinational Finance Town Campus Question Paper

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